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Do Stock Splits Matter?

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Don’t expect some popular stocks to “split” despite sky-high share prices…and don’t assume that a split makes shares more attractive.

Stock splits—multiplying the number of shares held by the public while dividing the price by the same amount—used to be common. Companies figured that a lower share price would make stocks more affordable for small investors. In 1997, 102 companies in the S&P 500 stock index split their stocks. But last year only seven did…and this year only two as of August.

Amazon.com shares have been hovering around $1,000. Priceline recently topped $2,000. And one class of Warren Buffett’s Berkshire Hathaway has traded above $265,000 per share.

A split does not change the overall value of stock held by an investor. In a two-for-one split, for instance, a stock trading at $100 per share instantly drops to $50, but shareholders have twice the number of shares as before—no change in overall value. And a 10% increase in the price of each share is a 10% increase no matter what the share price is or how many shares the investor owns.

But does a split affect how much a stock’s value rises or falls? Not so much anymore. In the past, brokerages could get a better per-share price for clients willing to buy in “round lots” (multiples of 100 shares), so there was an advantage to making it easier to own more shares. Several studies in the 1990s found that when stocks split, they outperformed the overall market. One study found that after stocks split, they beat the overall market by two to three percentage points annually over the following three years. But nowadays, small investors are able to get decent purchase prices on their orders (and low commissions) even if they buy a small number of shares. The split advantage seems to have faded.

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Source: Charles Rotblut, CFA, a vice president at the American Association of Individual Investors (AAII) and editor of the AAII Journal, Chicago. AAII.com Date: October 1, 2017 Publication: Bottom Line Personal
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